Momentum building on tax reform

As senators invite the public to contact them with ideas on tax reform, advisers should speak up

The latest tax reform plan from Congress has something for everyone, from big corporations to middle-class families. And while we’re a long way from seeing a major tax overhaul come out of Washington, it is good to have our elected representatives realize the status quo is not acceptable to most Americans.

Let’s start with the complexity of the current tax laws. Unless you are able to file a very basic tax return, most taxpayers find filing their taxes a burdensome chore, right up there with having a root canal at the dentist’s office, and are resigned to paying someone to take care of it for them.

But even the tax pros have problems deciphering the tax code.

We’re reminded of a recent passage by one of our columnists, who said there is so much confusion about how certain options are taxed that the IRS essentially told stock brokers to make their best effort in following the law but granted them penalty relief in advance if they got it wrong.

You know something’s wrong when even the agency in charge of the tax code can’t figure it out.

If nothing else, the plan put forward by Sen. Marco Rubio, R.-Fla., and Sen. Mike Lee, R-Utah, two weeks ago is a step in the right direction in terms of streamlining our tax laws. It would reduce the number of tax brackets from seven to two — 15% and 35% — and eliminate all tax deductions except for mortgage interest and charitable giving.

The plan would set the corporate tax rate at 25% for both corporate and pass-through entities. That’s important to financial advisers because like other small businesses, many pay their business income taxes on a pass-through basis, meaning they pay them on their individual tax returns.

ELIMINATION

Other elements include ending the estate tax and eliminating taxes on capital gains and dividends. The cost of investment by businesses would be deductible in the year in which it was made, but new business debt would no longer be tax deductible.

Like we said, something for everyone.

And that’s the biggest problem with the Rubio-Lee plan. Someone’s got to pay for this bag of goodies, and you can guess who that is — the American public. In its present form, the plan would reduce annual tax revenue by $414 billion, according to the Tax Foundation’s initial review.

The senators don’t disagree with this analysis but say it’s unfair because it does not incorporate the growth in the economy their tax changes would bring about.

The Tax Foundation agrees with that objection and says that once the tax dollars from the added growth are factored in, the plan could produce a $90 billion increase in annual revenue.

The footnote to that analysis, however, is that it will take 10 years for that growth to fully materialize; in the interim, the tax plan will add to the federal budget deficit.

While a more detailed tax reform plan last year from then-Rep. David Camp, also designed to simplify the tax code, didn’t go anywhere, there seems to be momentum building in Washington to do something. It may not be the Rubio-Lee plan, but perhaps a variation on it.

JOIN THE DISCUSSION

Last week, two other senators, Orrin Hatch, R-Utah, chairman of the Senate Finance Committee, and Ron Wyden, D-Ore., ranking member of the committee, invited the public to contact them with ideas on tax reform.

Advisers should take them up on their offer.

The senators want to know how the tax code affects individual behavior. Because of their interaction with clients, advisers are in a prime position to know that. Now is the time to join the discussion.